Time to Dismantle the Channel Welfare State

Weight of channel entitlement programs is doing more to retard rather than promote growth

There’s a lot of discontent these days with the state of the channel that largely stems from some of the very core economic theories that the channel is based on.

The root of the problem that many companies have with the channel as it currently exists is that channel chiefs routinely struggle with the number of partners in their programs that are living off the channel equivalent of entitlement programs. At some point a channel partner closed a few deals for that vendor, but they have not brought in any new deals for one reason or another in quite a while. At the same time, the vendor is compensating that partner for maintenance revenues even though the brunt of all that maintenance work is provided by the vendor.

To the outside observer that business arrangement has a lot of socialistic qualities in that there is no incentive for partners to really go out and drum up new business. To some it even suggests that the channel model is fundamentally broke.

Taylor Macdonald, channel chief for Intaact, a provider of accounting software that is delivered as a cloud service, has taken the position that partners that are not generating new business on a regular basis will be drummed out of the company’s channel program. As a smaller vendor, Intaact can afford to take that position because there are only 75 partners in the company’s channel program.

While Macdonald would not mind increasing the size of the Intaact channel program, he’s careful not to bring on partners that are going to compete too much in one area, or simply drain Intaact resources after closing a handful of deals.

This same issue is also at the heart of a recent Microsoft move to consolidate many of its solution provider relationships under a master value added reseller (VAR) program that makes it less profitable for smaller solution providers to participate in Microsoft channel programs. Some Microsoft rivals are trying to exploit these changes in the Microsoft program to entice solution providers to switch allegiances. As the saying goes, all is favor in love and war. But the fact that this channel debate is taking place at all should be troubling for all concerned.

The core issue is really the economic efficiency of the channel. If channel programs become bloated, the cost of supporting the channel reaches a point where it’s not profitable for the vendors. They then start to retreat from the channel by going direct, which ultimately hurts everybody. Granted, it’s the responsibility of the vendors to police their channels. Many of them, particularly amongst the larger vendors, have become bloated over the years due to a lack of focus. Many large companies are choking on channel support costs, but fear doing anything meaningful about it because of the potential backlash.

But bloated channel programs also harm solution providers, at least the ones trying to land new deals. If resources in the channel are being consumed by companies that basically milking revenues, than there are less resources available for companies trying to close new deals. It should be noted, however, that many channel partners closed deals over the years factoring in maintenance revenues into their overall business plan. The problem from a vendor perspective is that during the economic downturn it became apparent this business model has spun out of control in much the same way that Republicans argue that entitlement programs are crippling the economy. Smaller companies, of course, can afford to disenfranchise a few resellers here and there, but any attempt to do something drastic by a major vendor would probably result in class-action lawsuits that would tie the vendor up in court for years to come.

That reality, however, doesn’t make the fundamental problem go away. Larger companies are going to soon find themselves losing market share to smaller companies that have nimbler more efficient channel programs. Some might argue that’s just the way of the IT channel world. But others might just as easily say it’s time to take a hard look at channel programs. Instead of giving incentives to organizations doing all the right things to promote IT sales and expand the market, too many companies actually wind up creating the IT equivalent of a social welfare program.

Unfortunately, the sad fact is that many channel programs cost more to participate in than they are worth, which is why you see so many of the better managed solution providers focusing more on generating their own services revenue than how much money they can milk out a channel program. That doesn’t mean that all channel programs are bad. It does means that many of them are overly complex, and the programs that actuall do promote new business activity are usually lost in a sea of programs that are quixotic at best.

Like most contentious issues, there are obviously a lot of special interest groups in the channel that will vehemently defend the status quo. But deep in their hearts everybody involved in the channel knows there are a lot of practices that are not in keeping with the best economic interests of a maintaining sustainable, healthy channel. The time to acknowledge that simple fact and then start a meaningful dialogue about what to do about it is now.